U.S. Treasury Proposes Regulations That Would Eliminate Most Valuation Discounts for Intra-Family Transfers of Interests in Family-Controlled Entities

On August 2, 2016, the U.S. Treasury issued long-awaited proposed regulations under Section 2704 of the Internal Revenue Code that will, for the most part, eliminate valuation discounts for lack of control, lack of marketability, and minority interests with respect to intra-family transfers of family-controlled entities. These discounts have figured prominently in many estate planning techniques.  If these proposed regulations are made final, they will have a significant negative impact on many proven estate planning techniques.

The effective date of some of the regulations will be the date that the regulations are published as final regulations.  A hearing is scheduled to receive comments concerning the proposed regulations on December 1, 2016.  Thus the regulations will not become final until after that date.  Some important parts of the regulations will apply to transfers occurring 30 or more days after the date of publication.

It is possible that the final regulations could be significantly delayed, altered, or successfully challenged.  However, most experts are urging high net worth families to consider making gifts of family-controlled entities on or before December 1, or possibly as late as the end of the year 2016 in some cases, in order to take advantage of the existing rules that allow the targeted valuation discounts.  Even if actions are timely taken, it is possible that a new “three-year rule” might apply the new rules to transfers before the effective date of the regulations, if the transferor dies after the effective date, but within three years after making the transfer.

If you don’t foresee a chance that your estate will be subject to estate and gift tax at your death or that you could be making transfers subject to gift tax and/or generation-skipping tax, then this change may not affect you detrimentally.  In fact, it may be beneficial to the family heirs of your estate from an income tax perspective.  The inflation-adjusted unified credit against the combined estate and gift tax equates to an exemption on combined lifetime taxable gifts and estates of $5.45 million in 2016 (up to $10.9 million for a married couple).

If you might now or in the future have gifts and an estate that, in the aggregate, exceed the unified lifetime exemption amount, you should contact your HM&M advisor or estate planning attorney promptly.  There may be actions you need to take very soon.

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